The Leader has been named the best large weekly newspaper in Arkansas. It has offices in Jacksonville and Cabot and covers north Pulaski County, Lonoke County and White County. The Leader is a family owned and operated newspaper that was founded in 1987.

Tuesday, November 01, 2011

EDITORIAL >> Flat tax panaceas

Running for president as a Republican means having to promise to overhaul the tax code so that it is simpler and fairer. The assumption people are supposed to make is that they also will pay less to Uncle Sam every year, although every candidate is careful not to make that promise.

You can measure the intelligence of the candidate by whether he produces a precise plan for doing that. If he does, he is stupid. Everyone is free then to put the calculator to his plan and see how people and the government actually would be affected. It is never pretty. If you make a vague promise of a simpler and fairer tax system, like, say, Mitt Romney, you always stay above the fray. There’s nothing to criticize.

This season, Herman Cain and Rick Perry have offered their own plans: Cain’s loopy 9-9-9 plan and Perry’s so-called “flat tax,” which he calls “Cut, Balance, and Grow.” (The season requires that every campaign make promises in multiples of threes.)

Neither Cain nor Perry paid much attention in 1996 when Steve Forbes, the billionaire publisher and investor, announced a flat income tax as the cornerstone of his campaign for the presidency. Forbes proposed a single tax rate on all income. He would have eliminated all deductions—for mortgage interest, charitable contributions and everything else—but fixed personal exemptions at a high-enough level that the poor would not be overburdened with taxes. But analysts, including his Republican opponents, did the calculations and supplied the figures. It would mean a tremendous tax cut for the very rich and substantial tax increases for the middle class—that is, unless the government decided to take in a lot less money and either cut defense spending and entitlements drastically or borrow trillions more from China.

The problem is that it is easy to analyze these ideas very precisely. It’s an exercise you can do at home. If you’ve got an hour, you can calculate whether you will pay more or less under the scheme. And you can go online to the U.S. Treasury Department and download the latest summary of federal income-tax receipts for Arkansas, which breaks them down by income group and by each deduction, exemption and credit.

You can see how the plan would impact Arkansas—whether more or less would be sucked out of the Arkansas economy to pay Washington’s bills, which income class in Arkansas would pay more or less and how many Arkansas citizens are in that bracket. When President Bush was slashing income taxes, primarily on higher incomes and corporations, in 2001-04, you could measure just how each tax bill was likely to affect Arkansas, including exactly how many people with incomes above $300,000 or $1 million would be paying less and how much less on average.

Cain’s proposal—a flat percent income tax on individuals and corporations, plus a 9 percent sales tax on every purchase of a commodity or service—got quickly analyzed by his opponents and ridiculed by every tax research group, conservative or liberal, in the country. It would be a bonanza for the rich and a backbreaker for the middle class. It wasn’t as simple as Cain made it either. In the few details he supplied, you discovered that not all income was to be taxed at 9 percent. A millionaire, for example, would see his top marginal rate reduced from 35 percent to 9 percent, but on all his income from capital gains, stock dividends and other forms of investment he would pay zero. For many of the nation’s wealthiest citizens, their effective tax rate would be zero. You would make up the difference.

So Perry decided to do better. He had someone devise for him a single tax system. No sales tax to clutter it. He wanted to be able to say that his plan would be so simple that a fool could fill out his return in minutes and that he could say that people wouldn’t see their taxes raised.

What he produced was a plan that, far from being simple, would be a much bigger headache than the present nightmare. And it likely would produce so little revenue for the federal government that Congress would have to do away with much of the entitlements and/or the military or else start running far bigger deficits. Well, you can’t have everything.

See, Perry’s plan would have every taxpayer figure his or her taxes under the present IRS system and also under his system. The taxpayer could file his taxes under whichever plan he wanted, presumably the one under which he would pay the smallest tax. People with fairly low incomes and very high incomes would like Perry plan because they would pay lower taxes, for the very rich much lower taxes. It would allow them to keep all their current deductions and exemptions. Many people in the middle would choose the present system because they would pay less that way. The rich? The new plan would be a bigger boondoggle than the present revenue code. Their taxes would be nearly nonexistent.

When critics pointed out the benefits for the super-rich, Perry responded, so what? He won’t apologize for helping the people who create jobs.

In an effort to make a flat tax popular—that is, by allowing everyone to choose the system that taxed him or her less—he would make the whole revenue system unworkable. The tax system would be hugely more unfair and even more complicated, and it would undermine government.

In this instance, stick with the men who only utter vague generalities. They know what they’re doing. The others are chasing fool’s gold. —E.D.